We show that the expansion of financial sector may hurt innovative activities and hence the innovation-led growth, using data on 50 countries over the 1990–2016 period. Countries with higher level of financial development are found to have a smaller positive or insignificant effect on innovation. The marginal effect of innovation on growth is a decreasing function of financial development. Using a dynamic panel threshold method we re-examine the possible non-linearity between finance, innovation and growth. We find that innovation exhibits an insignificant effect on output growth when credit to the private sector exceeds a threshold level of about 60% as a share of GDP. These results are not driven by banking crises, the long run effect of 2007–2008 financial crisis, or the ongoing European sovereign debt crisis.
- Financial development
- Threshold effect
Zhu, X., Asimakopoulos, S., & Kim, J. (2020). Financial Development and Innovation-led Growth: Is Too Much Finance Better? Journal of International Money and Finance, 100, 1-24. . https://doi.org/10.1016/j.jimonfin.2019.102083